Fitch assesses Iran war impact on South Caucasus economies

Azerbaijan's economy will demonstrate growth of 2.2% in 2026 compared to 1.4% in 2025, Fitch Ratings said in a review analyzing the consequences of military operations in Iran for the economies of the South Caucasus states, Report informs.

According to the adjusted forecasts of the Azerbaijani government, the growth rate of the national economy in 2026 will be 1.7%.

The agency's analysts attribute this forecast [2.2%] to a decline in oil production volumes and gas production reaching a stable level. In their assessment, the threats of direct disruptions to the energy supply system appear insignificant.

"Georgia sources most of its gas from Azerbaijan (BBB-/Stable), whose oil and gas infrastructure is not at direct risk. Armenia has a long-standing fixed-rate gas arrangement with Russia's Gazprom. Exchange-rate pressures have also remained muted, with the Georgian lari and Armenian dram broadly stable against the US dollar in the first month of the war," the experts emphasize.

Overall, Fitch believes that the military operations in Iran create difficulties for the economic policies of the sovereign states of the South Caucasus, primarily due to rising energy and logistics costs rather than the direct spread of armed conflict.

"A prolonged shock would raise inflation risks and widen external deficits, especially in Armenia (BB-/Positive) and Georgia (BB/Stable), which are net energy importers. However, stronger international reserves, so far limited currency pressures and fairly secure energy supplies constrain near-term risks to sovereign ratings. Fitch also expects policymakers to respond if second-round inflation effects, weaker exchange rates or unanchored inflation expectations emerge," the agency notes.

"Higher international energy prices would feed into transport, utility and food costs, and could lift inflation from currently moderate levels. Pressure could also come through higher fertiliser prices and other imported inputs. Even so, real interest rates remain positive in the region. This gives central banks some room to contain broader inflationary effects if the shock persists," Fitch analysts believe.

Fitch expects Georgia's current account deficit to widen to 5.3% of GDP in 2026. Armenia's deficit is likely to amount to 5% of GDP in 2026, from a seven-year high of 7.2% in 2025.